Court of Appeal confirms Part 36 offer cannot be made exclusive of interest

The Court of Appeal has confirmed that an offer which is made exclusive of interest cannot be a valid Part 36 offer: King v City of London Corporation [2019] EWCA Civ 2266.

CPR 36.5(4) provides that a Part 36 offer to pay or accept a sum of money "will be treated as inclusive of all interest until" the expiry of the relevant offer period (typically 21 days after the offer was made). There had, however, been conflicting first instance decisions as to whether this precludes the ability to make a Part 36 offer exclusive of interest, either generally or in the context of detailed assessment proceedings.

The present decision is therefore welcome clarification that, to be valid under Part 36, an offer cannot be exclusive of interest, at least up to expiry of the relevant period. Although it is not addressed in the judgment, it would seem it must still be possible to exclude interest after the expiry of the relevant period, as CPR 36.5(4) only refers to the offer being inclusive of interest up until that date. In Calonne Construction Ltd v Dawnus Southern Ltd [2019] EWCA Civ 754 (considered here) the Court of Appeal held that including a term as to interest after the end of the relevant period did not affect the validity of a Part 36 offer.

As a practical matter, therefore, parties who are making Part 36 offers should ensure they take into account any interest that might be awarded up to the end of the relevant period in calculating the level of the offer. A party who overlooks this point may find that the offer is pitched lower than intended - which, for a claimant, may mean that they lose out if the offer is accepted and, for a defendant, may mean that the offer does not give effective costs protection.

Background

The parties agreed a consent order settling the underlying claim. This provided for the defendant to pay the claimant £250,000 plus costs "to be assessed if not agreed on the standard basis".

The claimant served his bill of costs and commenced detailed assessment proceedings. His costs consultants then made a settlement offer on his behalf in a letter to the defendant's solicitors. This was headed "Part 36 offer" and put forward an offer to accept £50,000 in full and final settlement of the costs detailed within the bill. The letter stated that the offer related to the whole of the claim for costs "but excludes interest".

CPR 47.20 applies the provisions of Part 36 to the costs of detailed assessment proceedings, with necessary modifications including that "claimant" refers to the receiving party and "defendant" the paying party, and "judgment" refers to the outcome of the detailed assessment. Paragraph 19 of Practice Direction 47 states, "Where an offer to settle is made, whether under Part 36 or otherwise, it should specify whether or not it is intended to be inclusive of the cost of preparation of the bill, interest and VAT. Unless the offer states otherwise it will be treated as being inclusive of these."

In the present case, the defendant did not accept the offer and the claimant's bill was assessed at £52,470 excluding interest. The claimant sought to rely on CPR 36.17, which provides favourable costs consequences where judgment against a defendant is at least as advantageous to the claimant as the proposals contained in the claimant's Part 36 offer. The Deputy Master, however, found that the offer was not a valid Part 36 offer because the term as to interest was inconsistent with Part 36. The Costs Judge dismissed the claimant's appeal, and the claimant brought a further appeal to the Court of Appeal.

Decision

The Court of Appeal (Newey, Coulson and Arnold LJJ) dismissed the appeal.

It was common ground between the parties that an offer which fails to comply with the requirements of CPR Part 36 in an essential respect will not take effect as a Part 36 offer even if it is expressed to be one. The defendant argued, however, that CPR 36.5(4) does not impose a mandatory requirement but merely operates as a deeming provision, so that an offer which is silent regarding interest is taken to include it. The Court of Appeal rejected that argument, finding that CPR 36.5(4) is mandatory.

The defendant contended, in the alternative, that there could be no objection to an offer excluding interest because Part 36 allows an offer to be limited to "part" of a claim, and that both the interest element and the balance excluding interest are parts of a claim for these purposes. The Court of Appeal also rejected that argument, commenting that Part 36 proceeds on the basis that interest is ancillary to a claim, not a severable part of it.

The Court of Appeal found that the position is no different for Part 36 offers in the context of detailed assessment proceedings than for Part 36 offers generally.

The above conclusions were not affected by paragraph 19 of PD 47. There could be no question of  that provision controlling the interpretation of CPR Part 36, as practice directions are (citing May LJ in Godwin v Swindon Borough Council [2001] EWCA Civ 1478) "at best a weak aid to the interpretation of the rules themselves". The terms of paragraph 19 could reasonably be attributed to a "less-than-perfect attempt" to adapt the terms of the costs practice direction when the provisions of Part 36 were applied to detailed assessment proceedings from April 2013.

It also rejected the claimant's argument that the offer in this case could be treated as inclusive of interest as a result of CPR 36.5(4), even though it stated expressly that it "excludes interest". It was, the court said, "inconceivable that CPR 36.5(4) was meant to turn an offer specifically stated to be exclusive of interest into one including interest" as that would grossly distort the offeror's intentions.

The true position was not that the claimant's offer was to be treated as inclusive of interest, but rather that it did not comply with CPR 36.5(4) and therefore was not a valid offer.